Consolidated FS; Acquisition Method

Question 1

Consolidate FS

Answer 1

• Control (over 50%)

- Prepared when a parent-sub relationship has been formed.

Question 2

Acquisition Method

Answer 2

• required to be used to record the acquisition of a sub under GAAP and IFRS.
• Recognition Principle: the acquirer recognizes all of the sub’s assets and liabs, including identifiable intangible assets.
• Measurement Principle: the acquirer measures each recognized asset and liab. and any noncontrolling interest at its acquisition date fair value.
• consolidate sub at 100% FV at acquisition date

Question 3

Acquisition Method accounting

Answer 3

• investment is valued at fair value of the consideration given or the fair value of the consideration received.
• begins on date of acquisition

Question 4

Application of Acquisition Method

Answer 4

• 100% of the net assets acquired are recorded at fair value with any unallocated balance remaining creating goodwill
• when the companies are consolidated, the sub’s entire equity is eliminated

Fair value = acquisition price = investment in sub

Question 5

CAR IN BIG

Answer 5

C - Common Stock of sub is eliminated
A - APIC of sub is eliminated
R - Retained Earnings of sub is eliminated
I - Investment in Sub is eliminated
N - Noncontrolling Interest (NCI) is created if not 100% owned
B - Balance Sheet of Sub is adjusted to FV
I - Identifiable Intangible Assets of Sub are recorded FV
G - Goodwill (or Gain) is required

Question 6

CAR - Subsidiary Equity Acquired

Answer 6

A - L = E
A - L = NBV
A - L = CAR

• the determination of the difference between BV and FV is computed as of the acquisition date.

Question 7

Investment in Sub

Answer 7

Original Cost - measured by the FV of the consideration given (debit: investment in sub)
Business Combo costs/expenses in an acquisition are treated as follows:
- Direct out-of-pocket costs such as a finder’s fee or a legal fee are expensed (debit: expense)
- Stock registration and issuance costs are a direct reduction of the value of the stock issued (debit: APIC of the parent)
- Indirect costs are expensed as incurred (debit: expense)
- Bond issue costs are capitalized and amortized (debit: bond issue costs)

Question 8

Noncontrolling Interest (NCI)

Answer 8

• report in consolidated equity
• NCI must be reported at FV in the equity section of the consolidated BS, separately from the parent’s equity. This will include the NCI’s share of any goodwill.

FV of sub * NCI% = NCI (acquisition date computation)
Beg. NCI + NCI share of sub NI - NCI sub div.= End NCI

Question 9

Allocation of Sub’s Net Losses

Answer 9

• allocated to NCI even if the allocation exceeds the equity attributable to the NCI (negative carrying balance).

Question 10

NCI - Income Statement

Answer 10

The consolidated IS will include 100% of the sub’s revenues and expenses (after the date of acquisition).

Sub’s Income - Sub’s expenses = Sub’s NI
Sub’s NI * NCI % = NI attributable to NCI

Question 11

NCI (IFRS)

Answer 11

• Full Goodwill Method (GAAP):
  NCI = FV of sub * NCI %
• Partial Goodwill Method (IFRS):
  NCI = FV of sub’s net identifiable assets * NCI %

Question 12

BIG

Answer 12

B - Balance Sheet adjustment of the sub’s records from BV to FV
I - Identifiable Intangible Assets related to the acquisition are records at FV
G - Goodwill is recognized for any excess of the FV of the sub over the FV of teh sub’s net assets. If the FV of the sub is < the FV of the sub’s net assets, a gain is recognized. Not amortized, tested for impairment.

Question 13

In Process Research and Development (IP R&D)

Answer 13

• Carry as asset
• recognized as an intangible asset separately from goodwill at acquisition date
• do not immediately write off
• IP R&D meets the definition of an asset - it has probable future economic benefit.

Expense “continuing” R&D to complete project
Later: 1. project success - amortize IP R&D
2. project failure - impair/write off IP R&D

Question 14

Goodwill (IFRS vs GAAP)

Answer 14

Full Goodwill Method (GAAP):
- Goodwill = FV of sub - FV of sub’s net assets

Partial Goodwill Method (IFRS):
- Goodwill = Acquisition cost - FV of sub’s net assets acquired

Question 15

Consolidated Statement of Cash Flows - Period of Acquisition

Answer 15

• the net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows.
• the assets and liabilities of the sub on the acquisition date must be added to the parent’s assets and liabilities at the beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period.

Question 16

Consolidated Statement of Cash Flows - Subsequent Periods

Answer 16

• when reconciling NI to net cash provided by operating activities, total consolidated NI should be used.
• the financing section should report dividends paid by the sub to noncontrolling shareholders. Dividends paid by the sub to the parent company should not be reported.
• the investing section may report the acquisition of additional sub shares by the parent if the acquisition was an open market purchase.

Question 17

Non-contol –> Control (step transition)

Answer 17

• remeasure previously held equity interest to FV
• the income statements will reflect this adjustment
• previous common stock adjustment to FV. recognize in income statement

Question 18

Control –> More or Less control

Answer 18

• Equity transaction (no gain or loss recognized on the income statement - APIC adjusted)
• treat like a treasury stock transaction

Question 19

Control –> Non-control

Answer 19

• recognize the gain or loss of the sale of stock (IS)
• remeasure the remaining non-consolidating interest to FV
• recognize the adjustment to FV on the income statement

Question 20

Acquisition Method Disclosures (most important)

Answer 20

• in a business combo achieved in stages

- if the acquirer is a public entity

Question 21

Consolidation Disclosures

Answer 21

Consolidated FS should disclose the consolidation policy that is being followed.